In studying the habits of millionaires, one of them is to constantly learn about different means to achieve financial success.
One path to achieve that financial success is trading options. Sometimes the process of trading seems daunting because there is so much terminology that goes with it.
Let’s simplify some of that terminology and discuss four different ways to invest your hard earned cash:
Publicly registered companies sell parts of their business in the form of stocks, also called ‘shares’. Put simply, stockholders own a small part of the company.
The money is typically used to grow the business further.
To earn from stocks, you can sell your shares at market prices higher than when you bought them.
You may also receive a dividend, which is a percentage of profits of the company you partially own. Dividends may be paid regularly, but they are not as high as the returns from selling shares.
Risks: Reporter Zach Carter cautions that the stock market is based on ‘unknowable future data’. Prices rise or fall based on company announcements or news.
Start-ups involved in game-changing products or services are risky, but their market prices have the potential to dramatically trend upwards. Older and established companies, meanwhile, usually have share prices that are not as volatile, which means there’s less risk.
When it comes to effective strategies with the stock market, it’s best to diversify your money into different companies.
Short for foreign exchange, this is the buying and selling of currencies.
If you have traveled to another country, then you have most likely exchanged your cash into the currency of the country you were visiting based on the current exchange rate.
These changes in exchange rates is what allows you to make money in a foreign exchange market.
The Independent cites an example of traders making forecasts on how the dollar will stand up to the pound (England’s currency). If they predict that the dollar’s value will go higher, they will buy more dollars in exchange for their pounds. If they were correct, then they profit from the exchange. If not, then they sold at a loss or the trader holds onto the currency until they can profit from it.
Risks: There are many variables that can drastically affect exchange rates – the politico-economic situation in a country, fiscal policies, and even disasters.
While you can earn from these transactions, many analysts say that forex trading is basically gambling because there’s no way to control the outcome.
It’s best to read as much as possible on how the forex market behaves and consult traders on the different ways to earn money in the short- and long-term.
A futures contract is an agreement between a buyer and seller for a specific asset at an agreed price and date.
Say, for example, you have an orchard and are growing peaches. You agree on a price to sell the peaches to a buyer and sign a futures contract. You get the peace of mind knowing what your crop is going to sell for and the buyer benefits if the market goes up before the time of sell.
If you’ve ever seen the classic 80’s movie, Trading Places, you’ll remember that betting on futures is how Louis Winthrop III and Billy Ray Valentine got their revenge on Randolph & Mortimer Duke. They sold high and bought low while the Duke brothers did just the opposite.
The key components in this type of agreement are the main asset, expiration date, price, and leverage.
Traders are required to make down payments called ‘margin deposits’ to purchase a futures contract. The leverage is calculated based on the price of the contract divided by the amount of margin deposit. It’s an indicator of how much you are paying for the asset on the contract versus its actual price.
To earn from futures trading, FXCM explains that traders place an order for a specific futures contract or “lot” at a set price.
For example, a trader purchases WTI Crude Oil for $50 and keeps track of its price movements until the market closes. The agreement includes a specific value per movement or ‘tick value’, which in this example could be $10 per tick of 0.01 point. If oil’s price ends at $50.10 then a profit of 10 ticks has been made, amounting to $100. If the price closes at $49.90, then there was a loss amounting also to $100.
Risks: Like shares and forex, futures are also affected by socio-political climate and changes in economic trends.
New players in the futures market must do extensive research and form an effective enter-exit strategy to make a profit.
Gold can be used for trading in different ways, one of which is buying gold exchange-traded funds (ETFs) which are backed by physical gold.
You never actually own a gold bar or coins, instead you receive the cash value when you redeem a gold ETF.
They can be sold at prices higher than their market value.
Another method is to invest in the shares of mining companies that extract gold. Just like back in the days of the old west, gold mining companies continue to put time and resources in the process of discovering and processing gold. In order to finance this, many companies will offer public shares similar to owning stock. When the prices for gold rises, the investor can see a profit from owning gold mining shares.
Risks: VP of Derivatives Trading for Goldman Sachs Mark Kennedy reminds traders that gold ETFs are not like physical gold so you basically own a projected value of it. You can’t use the ETF itself to protect your money.
While physical gold can be a great long term investment, EFT’s are not. They are only short term investments, you want to buy low and sell high.
It’s important to note, gold ETFs must be sold periodically. Otherwise, they begin to lose their value due to holding costs required to keep the actual gold. If your holding cost is 1% per year, it would cost you $100 per year to own $10,000 worth of gold.
Stock and option traders that continue to learn and strategize can better weigh out risks for the possibility of big rewards!